Horizontal fiscal equalisation – the arcane “fair go” principle used to distribute GST revenue between the states – is devilishly complex, but at face value the Turnbull government looks to be on a political winner with the gradual revamp unveiled today. Despite headlines in Fairfax Media this morning branding New South Wales and Victoria as losers, the treasurer insists that by making the GST pool bigger, the government has ensured no state will be worse off, and he has $7 billion dollars to prove it. While the various states and territories pick over the detail ahead of a planned special meeting of the Council on Federal Financial Relations in September, Labor’s initial complaint was that the reform could have come sooner. It is all very well timed in the lead-up to the Super Saturday by-elections, and the federal election after that, but leaves one question hanging: as Jacqui Lambie asked on ABC’s RN Breakfast this morning, “Where’s all the money coming from?”

It is a reasonable question, because a previous review of the GST distribution under the Gillard government – when GST revenues tanked in the wake of the financial crisis – was told that there was “no extra Commonwealth revenue available with which to ‘buy’ reform, or smooth any transition”. That review, by former premiers John Brumby and Nick Greiner, as well as businessman Bruce Carter, pondered whether the Commonwealth Grants Commission, responsible for the distribution, should “do less equalisation”, but ultimately plumped for the status quo.

HFE has been around since federation, and is used by the commission to allocate tied and untied grant funding. Its aim is to ensure that each state or territory has broadly the same fiscal capacity, or capacity to pay for services like schools and hospitals, taking into account their taxation capacity, i.e., their ability to raise their own revenue based on factors like population, size and resource endowment. The formula uses rolling three-year averages to smooth out volatility.

After the mining boom caused a boom in royalties, a flush Western Australia saw its share of GST fall as low as 30c in the dollar. But when the boom turned to bust and revenues plunged, the lagging effect of the rolling three-year averages meant the state suffered a double-whammy. Former Liberal premier Colin Barnett was successful in putting the GST on the political agenda, lashing out at smaller states that got more than their fair share – especially Tasmania, which he labelled the “mendicant state” and Australia’s national park, causing deep offence and suspicion. As Fairfax Media’s Ross Gittins pointed out at the time, for a long time WA was getting more back than it paid in GST, and “it wasn’t complaining then”.

Last year New South Wales joined the debate from a different direction, complaining that the GST formula rewarded “lazy” states like Queensland, which did not undertake difficult reforms like privatising electricity. Treasurer Dominic Perrottet claimed at the time that New South Wales was a “victim of its own success”, some $15 billion worse off, and argued for a shift to a per capita system of funding. In its GST review released today, the Productivity Commission made similar recommendations, but the government has decided it would be too expensive. New South Wales would have been an “outsize winner”, reported Fairfax Media’s Eryk Bagshaw, quoting Treasurer Scott Morrison saying that the Productivity Commission’s model would “move too far from the ‘fair go’ principle of horizontal fiscal equalisation, and risk leaving smaller states behind”.

Like the government’s other tax reforms, the new formula will be introduced progressively over the next seven years, and will include a permanent offset fund to put a floor under the GST allocations and ensure no state gets back less than 70c in the dollar. Asked on Sunrise how the government could afford it, Morrison answered that the budget would be in surplus from next financial year and, after a decade, the extra cost would only be of the order of a billion dollars a year, compared with GST revenues a hundred times that.

As Lambie made clear this morning, Tasmanians remain suspicious about changes to the GST, particularly over the long term, and she described the whole thing as pre-election pork-barrelling. Although the Opposition has not ruled out support for the new GST formula, shadow treasurer Chris Bowen says the government will have to cut services or raise taxes to pay for it. “[The treasurer is] either going to increase the budget deficits or cut schools and hospitals,” Bowen told reporters today. “He may believe in magic pudding economics that he can do it all, Australians know better than that.”

In solidarity with the ABC and in protest at News Corp’s decision to send journalists to cover the Pacific Islands Forum in Nauru in defiance of a Press Gallery boycott of the event, The Monthly Today has decided not to link or refer to News Corp articles today.

since this morning

Long-time Labor backbencher Michael Danby has confirmed that he will retire from federal parliament, setting up a preselection race for his seat of Melbourne Ports.

Former NSW premier Bob Carr says that he does not regret flooding the state’s pubs with poker machines, but has acknowledged the social cost from what he describes as a “bargain with the devil”.

Fairfax Media reports that Greens senator Sarah Hanson-Young has demanded Liberal Democrat David Leyonhjelm pay her compensation and apologise within seven days or face defamation action over six separate statements he has made about her personal life.

in case you missed it

Australia has exchanged barbs with New Zealand over the imprisonment of a minor in adult immigration detention in Melbourne.

The Australian government has agreed to move a seriously ill refugee girl from Nauru to Australia within days.

Adelaide Archbishop Philip Wilson says he will lodge an appeal against his conviction for concealing child sexual abuse and won’t immediately resign.

Paddy Manning is a contributing editor (politics) at The Monthly. He is a writer and journalist who has worked for the ABC, Fairfax, Crikey and The Australian. He is also the author of three books, including Boganaire: The rise and fall of Nathan Tinkler.

Horizontal fiscal equalisation – the arcane “fair go” principle used to distribute GST revenue between the states – is devilishly complex, but at face value the Turnbull government looks to be on a political winner with the gradual revamp unveiled today. Despite headlines in Fairfax Media this morning branding New South Wales and Victoria as losers, the treasurer insists that by making the GST pool bigger, the government has ensured no state will be worse off, and he has $7 billion dollars to prove it. While the various states and territories pick over the detail ahead of a planned special meeting of the Council on Federal Financial Relations in September, Labor’s initial complaint was that the reform could have come sooner. It is all very...